I have come across many examples of small business owners or directors who use personal borrowing to supplement their business cash flow. This practice may not strictly be the right way to finance a business but certainly, it has for several years, been the reality for many businesses.
Unfortunately due to the effects of the credit crunch, personal credit is now becoming much harder to obtain. As has been widely reported, lenders are being more careful when considering what and to whom to lend thus affecting the availability of both secured and unsecured loans. In addition, despite interest rates being their lowest since records began, the interest being charged by banks for personal loans is now higher than any point in the last 5 years at between 8-9% APR. This increase means that even if money is available, it is more expensive to repay.
With personal borrowing more difficult to come by, small business owners are less likely to be able to get access to funds. As a result, the lifeblood of their business dries up, and all too often the business is unable to continue to operate. More and more businesses are therefore failing and jobs being lost.
In my view, this situation goes hand in hand with the problem of personal insolvency that we are currently experiencing in the UK. The Times on Sunday reported on the 23rd May 2009 a suggestion from the Citizens Advice Bureau that there may be many more people who are suffering personal insolvency in the UK than the official figures show. I believe that this analysis is absolutely correct. According to insolvency statistics published by the Insolvency Service, in the first quarter of 2009, just under 30,000 individuals were declared personally insolvent.
However, these figures only include formal insolvencies – i.e. people who have declared bankruptcy or entered into an Individual Voluntary Arrangement (IVA). I believe a conservative estimate would be that for every person declaring formal insolvency, there are at least another two who are insolvent but dealing with the problem by using an informal Debt Management Plan (DMP). A Debt Management Plan is simply a gentleman’s agreement between an individual and their creditors to reduce monthly debt repayments to fit within an affordable budget. There is no formal register of these plans and therefore no way currently to accurately measure the number of people who enter into them. If my estimation is correct, this would mean that an additional 60,000 individuals would have become insolvent in the first quarter, of 2009 totalling 90,000 altogether.
Surely the significant increase in the number of people suffering from personal insolvency simply highlights the problems that are currently being faced by small businesses. Where access to cash is not available, increasing numbers of businesses are likely to fail. The knock-on effect of this is increasing redundancy and the likelihood of personal insolvency for both employees and the former business owners themselves.
The Government has made its intentions clear to help businesses by increasing the availability of business loans. However, I believe that whether we like it or not, the lifeblood of small businesses is the finance that business owners take on personally in the form of personal loans and mortgage debt. As such, where these types of funds are not readily available, the difficulties currently facing small businesses are likely to continue.